As life changes, many Canadians find themselves needing to switch the use of their property — either moving into a rental home or temporarily renting out a home they currently live in.
These two scenarios may sound similar, but under the Canada Revenue Agency (CRA) rules, they come with very different tax implications.
This guide breaks down everything you need to know about:
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Rental → Principal Residence, and
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Principal Residence → Rental
including their shared tax principles, their key differences, and the CRA elections that can save you tens of thousands of dollars.
1. The One CRA Rule Both Scenarios Have in Common
Regardless of which direction the change happens, the CRA applies a core principle:
Changing the use of a property = A deemed disposition.
This means the CRA may treat the property as if you:
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Sold it at fair market value, and
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Immediately bought it back on the date the use changes.
This resets your adjusted cost base (ACB) and may trigger capital gains tax — unless you use one of the available elections.
Although both situations share this rule, the tax impact differs dramatically.
2. Converting a Rental Property Into Your Principal Residence
Goal: Avoid triggering capital gains tax immediately
When you move into a property that was previously rented, the CRA may consider you to have disposed of the property at market value on that date. That could create an immediate capital gain, even if you’re not actually selling the home.
To avoid this, the CRA provides a powerful tool:
⭐ The 45(2) Election
This election allows you to:
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Avoid immediate capital gains when the use changes
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Retroactively designate up to four past years as “principal residence years” (under certain conditions)
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Increase the tax-free portion of your future home sale
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Maximize your principal residence exemption over time
Best suited for:
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Owners planning to eventually live in a rental property
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Investors wanting to protect tax-free growth
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Anyone seeking long-term tax efficiency when selling
3. Turning Your Principal Residence Into a Rental Property
Goal: Preserve your principal residence exemption for as long as possible
When you move out of your home and start renting it, you risk losing principal residence status — which means future appreciation may be taxable.
To help with this, CRA offers another option:
⭐ The 45(3) Election
With this election, you can:
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Treat your home as your principal residence for up to four additional years, even while it’s being rented
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Continue sheltering growth from capital gains
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Avoid a deemed disposition at the time of change
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Benefit from tax flexibility if you plan to return to the property
Important conditions:
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You cannot claim CCA (depreciation) during the rental period
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You file the 45(3) election in the year you sell the property, not when you start renting it
Ideal for:
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Homeowners temporarily relocating for work
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Families renting out their home before moving back
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Anyone wanting to extend tax-free status on their home
4. Side-by-Side Comparison: The Ultimate CRA Cheat Sheet
| Category | Rental → Principal Residence | Principal Residence → Rental |
|---|---|---|
| Deemed disposition | Possible | Possible |
| Key CRA election | 45(2) | 45(3) |
| Principal residence exemption benefit | Retroactively add up to 4 years | Extend exemption for 4 years |
| CCA implications | Cannot claim once property becomes your home | If claimed previously, CCA must be fully recaptured |
| Tax on sale | Rental years are taxable (unless mitigated by 45(2)) | Rental years are taxable (unless protected by 45(3)) |
| Common mistake | Not filing 45(2) | Claiming CCA without understanding recapture rules |
5. Key Takeaways
Rental → Principal Residence
✔ Focus on avoiding immediate capital gains tax
✔ Use the 45(2) election strategically
Principal Residence → Rental
✔ Focus on preserving your principal residence exemption
✔ Use the 45(3) election and avoid claiming CCA
Final Thoughts
Changing a property's use may feel straightforward:
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“I want to live in my rental home,” or
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“I need to rent out my house for a couple of years.”
But under CRA rules, these transitions can dramatically impact your tax bill — sometimes by tens of thousands of dollars.
By planning ahead, understanding the elections available, and avoiding common pitfalls like incorrectly claiming CCA, you can greatly reduce your tax risk.
If you're considering switching your property’s use and want a clear, personalized breakdown of your tax options, feel free to reach out — I’d be happy to help you find the most tax-efficient approach.
Contact The Fisher Group – Your Real Estate Experts in Oakville and the GTA
Fisher Yu
📱 647.598.8488
📧 [email protected]
🌐 thefishergroup.ca
